The OIG compared existing state Medicaid programs’ generic prescription reimbursement limits with the new limits mandated by the Patient Protection and Affordable Care Act (PPACA), a.k.a. Obamacare. The highlights:

On average, the new federal reimbursement limits are 22% below the current state amounts.

Pharmacies in many states will face reimbursement cuts of 30% or more. (See the chart below.)

Total pharmacy revenues will decline by about $1.2 billion (-0.4%).

One more tricky day for you: The pharmacy industry has successfully lobbied to create state laws requiring that private payers provide “transparency” into generic reimbursement limits. Will savvy private payers rely on the forthcoming government limits to be the bad man?MEET THE NEW BOSS

Briefly: the PPACA directs the Centers for Medicare & Medicaid Services (CMS) to use a new formula for computing the Federal Upper Limit (FUL). The FUL is the federally established maximum amount that a state Medicaid agency can reimburse a pharmacy for dispensing a multiple source drug to a Medicaid patient.

Forty-five state Medicaid programs use their own State Maximum Allowable Cost (SMAC) lists instead of the current (pre-PPACA) FULs, which are grossly inflated vs. a pharmacy's acquisition cost. With SMACs, states can pay less than the FUL, but they cannot pay ingredient costs above the FULs for multisource drugs.

The SMAC lists are analogous to the MAC reimbursement limits that private payers use. States use various criteria for creating SMAC lists and determining SMAC amounts. See Appendix D of the OIG report for more details.

The PPACA redefined the FUL as the weighted-average Average Manufacturer Price (AMP) multiplied by “no less than 175 percent.” In my Drug Channels Institute economic reports, I refer to these amounts as “AMP-based FULs.” The OIG report calls them “post-ACA FUL amounts.”

In September 2011, CMS began publishing monthly FULs for multisource product groups. (See this page.) The AMP-based FULs data are still in draft form, so they are not yet used for reimbursement. CMS plans to issue its final rule in January 2014, which will trigger the application of the new rates later next year. See AMP Final Rule Delayed to ... January 2014?

For the 32 states that provided data, OIG compared the SMACs with the forthcoming AMP-based FULs. Here are the results.

Key points:

The kids are not alright. On average, the aggregate AMP-based FULs are 22% less than the corresponding SMACs. As the chart illustrates, the results vary widely by state. In 30 of the 32 states, however, the forthcoming AMP-based FULs are less than the current SMACs. These cuts will hurts, because a pharmacy typically earns higher profit from generic prescriptions. (See pages 94-99 of the 2012-13 pharmacy economic report.

For pharmacies in some big states: It’s hard. In 11 of the 32 states, the aggregate AMP-based FULs were more than 29% below the aggregate state MAC prices. Some of these states have lots of pharmacies, including Texas (4,400), Ohio (2,300), and North Carolina (1,800). Jack will not be happy.

States will continue to see, feel, touch, and heal their SMACs. The OIG found that states set SMAC limits for about 1,000 more drugs than are listed in CMS’s AMP-based FUL list. Thus, state Medicaid programs will still need to develop and maintain their SMAC lists. On average, 53 percent of the drugs covered by states’ MAC programs were not covered by the AMP-based FULs.

Total pharmacy revenues will f-fade by about $1.2 billion. Since many states are not adopting healthcare reform’s Medicaid coverage expansion, Medicaid’s spending share is projected to remain at about 8% of spending in 2014. Generic prescriptions account for about 25% of the pharmacy industry’s gross prescription revenues. Thus, a 22% reduction in Medicaid-paid generic prescriptions translates into about a 0.4% loss in total retail pharmacy revenues (=0.08*0.25*-0.22). Given pharmacy industry revenues of $275 billion to $280 billion, the 0.4% reduction from AMP-based FULs will be about $1.2 billion.

Private payers may join together with CMS. The National Community Pharmacists Association (NCPA) identifies a legislative goal of “[p]roviding clarity to plan sponsors and pharmacies w/regard to how MAC pricing is determined.” (source) Texas and Arkansas have already passed such laws. Looks like ACA has just provided a solution for private payers, which could create even more pain.

After 2010's healthcare reform passed, the pharmacy industry’s trade associations were congratulating themselves, claiming that the PPACA’s AMP provisions were “another step toward reducing what would have been major cuts to pharmacy reimbursement.” (source)

As reality has dawned, the pharmacy industry’s tone has shifted to bitter complaints about AMP. Check out Take this AMP and Shove it for a dated, but still accurate, summary.

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